Strategic Risk and Co-Operative Relationships: Experimental Evidence

23 Pages Posted: 20 Oct 2008

See all articles by Matthias Blonski

Matthias Blonski

J.W. Goethe University

Peter Ockenfels

Goethe University Frankfurt - Institute of Economics

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Date Written: October 17, 2008

Abstract

We test infinitely repeated prisoner's dilemma games with random continuation in the laboratory to capture the effect of strategic risk on co-operation. We propose a criterion building on Harsanyi and Selten's (1988) risk dominance concept and motivate it by three heuristic principles. Our criterion depends on the often disregarded "sucker's payoff" - the payoff of a co-operating player meeting a defector - and results in a critical discount factor delta* strictly larger than delta, the traditional criterion, above which co-operation is supported by Pareto-undominated equilibrium strategies and which has often been used in applications.

We find that changes in the frequency of subjects' co-operation in the lab are predicted far better by delta* than by the Pareto-dominance criterion reflected in delta. Our experiments, in particular, show that for parameter changes where the two criteria predict co-operation frequency changes in opposite directions, our alternative criterion delta* is the one that predicts correctly.

Keywords: co-operation, repeated Prisoner's Dilemma, experiments, strategic risk, risk dominance, sucker's payoff, collusion, corruption

JEL Classification: C72, C73, C92

Suggested Citation

Blonski, Matthias and Ockenfels, Peter and Spagnolo, Giancarlo, Strategic Risk and Co-Operative Relationships: Experimental Evidence (October 17, 2008). Available at SSRN: https://ssrn.com/abstract=1286039 or http://dx.doi.org/10.2139/ssrn.1286039

Matthias Blonski (Contact Author)

J.W. Goethe University ( email )

Economics Department
Frankfurt am Main, 60054
Germany

Peter Ockenfels

Goethe University Frankfurt - Institute of Economics ( email )

In house Post Box 81
Frankfurt am Main 60054
Germany

Giancarlo Spagnolo

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

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